RETAIL sales fell at the sharpest rate in four years last month, after strong Christmas trading was followed by a new year hang-over.

The 1.8 per cent drop in the seasonally adjusted volume of retail sales in January was greater than the decline of 0.8 per cent forecast by some City economists.

The worst hit sectors were household goods stores, clothing shops and other non-food areas, the Office for National Statistics said. While the slowdown came after a stronger-than-expected December, analysts said it indicated that three interest rate rises since August were starting to bite.

ING economist Rob Carnell said: "With retailers typically doing a large chunk of their annual sales in the period immediately either side of Christmas, this is a bad outcome, and one that may eat into GDP growth in the first quarter of 2007."

The three-month trend for the period November to January, which is more closely watched by the Bank of England, showed a rise of 0.9 per cent on the previous quarter and a gain of 3.5 per cent on the same period a year earlier.

That was after a strong Christmas when retail sales volumes rose 1.1 per cent between November and December - the biggest monthly rise since June, 2005.

Howard Archer, chief UK economist at Global Insight , said the offer of January sales bargains had failed to tempt shoppers.

He added: "This reinforces our belief that consumers are still relatively cautious in their behaviour."